Hearing: Hearing On Members Proposals On Tax Issues Introduced In The 109th Congress

Statement

Hearing: Hearing On Members Proposals On Tax Issues Introduced In The 109th Congress

Chairman Camp, Ranking Member McNulty, members of the Select Revenue Committee; I want to thank you for the opportunity to testify today about H.R. 4961, the Self-Employed Health Care Affordability Act.

As we meet with constituents, we all hear concerns about the rising cost of health care. Whether it is the costs facing individuals and families attempting to purchase insurance coverage or an employer trying to provide health care for their employees, the cost of health care is clearly a priority issue.

For business owners the rising cost of health care leads to a number of challenges. Offering a good benefits package can help to attract and retain employees. In addition, the increased price of health insurance that employers must pay means that they cannot reinvest that capital into expanding or improving their business.

The rising cost of health insurance is an especially acute problem for the smallest employers - the self-employed. Despite being small, the self-employed play a critical role in the economy with more than 18 million business owners and, according to the last U.S. Census, employ more than 12.3 million workers with a total payroll of more than $309 billion. In addition, we know that these businesses often play an especially important role in our local economies and, in some cases, these small companies with big ideas expand into large employers.

A chief impediment to the growth of these small and micro businesses is the rising cost of health care. A 2002 survey released by the National Association for the Self-Employed (NASE) found that seven in 10 self-employed business owners provide no insurance for their employees and did not cover themselves. They cited cost as the primary reason.

Despite the complexity of this problem, there is a fairly simple solution that can help. Currently, the self-employed pay an additional 15.3 percent tax on the cost of their health insurance that other companies are not required to pay.

As you know, all compensation is taxed at 15.3 percent to meet the requirements of the FICA tax. For all businesses, except the self-employed, health care is considered an ordinary business expense meaning they are not subject to the 15.3 percent tax on the cost of health care.

The Self-employed - Schedule C filers (solo proprietors) and Schedule E filers (partners in partnership with earned income and two percent owners in S Corps) - pay both an income and a self-employment tax. In 1986, the self-employed were permitted to claim a deduction for the cost of health insurance as it relates to the income tax. The deduction is not available for the self-employment tax.

H.R. 4961, the Self-Employed Health Care Affordability Act, would create equity in the tax code amongst all employers by allowing the self-employed to deduct the cost of health insurance when determining their self-employment tax, thus reducing the cost of health care. I introduced this bill with Chairman of the Small Business Committee, Donald Manzullo and we currently have 28 bipartisan cosponsors.

First, H.R. 4961 will reduce the cost of health insurance for the self-employed. A recent Kaiser Family Foundation Survey found that the typical self-employed individual pays, on average, $10,880 annually for family coverage. Permitting the full deduction of health insurance costs would save these families about $1,665 on their annual taxes. Additionally, because these individuals are typically purchasing insurance in an individual market, premiums are approximately 18 percent higher than a larger corporation that can negotiate lower prices.

Second, eliminating this tax inequity provides additional capital that can be invested back into the business. For example, Mark Edelmann, an architect and construction manager from Bradfordwoods, Pennsylvania, must pay $1,285 each year in self-employment tax on the cost of his health insurance. Mr. Edelmann said:

"As a small, Pennsylvania business the additional tax burden on already overpriced small business healthcare premiums - takes away resources that we could use to grow our business. We would use this money to reinvest in our business and grow. By growing we can add employees and expand our market base."

Mr. Edelmann's statement and the hundreds of similar statements made by the self-employed from all around the country are echoed in the recent Small Business Administration Office of Advocacy report "Health Insurance Deductibility and Entrepreneurial Survival." Specifically, the report finds that the deductibility of health insurance costs when determining the self employment tax decreases the probability that both single and married filers would exit the entrepreneurial sector.

H.R. 4961 is a common-sense change to the Tax Code, which can lower the cost of health care coverage and preserve and increase the entrepreneurial activity of the self-employed. That is why this bill and its Senate companion, S. 663, introduced by Senators Thomas and Bingaman is endorsed by a broad coalition including the National Association for the Self-Employed, the U.S. Chamber of Commerce, the American Farm Bureau, and others.

Again, thank you for providing me with the opportunity to explain this important legislation and I look forward to any questions.

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